Posted by: Bob Wiley | February 11, 2013

Rising Demand Propels Warehouse Market to Strong 2012 Finish

With a burst of positive absorption in the fourth quarter, demand for U.S. warehouse space moved from the recovery to the expansion phase in late 2012 as rising occupancy rates and limited new construction helped push rents a bit higher across a majority of markets.Positive net absorption of warehouse space spread across the country, causing the U.S. vacancy rate to decline 30 basis points in the fourth quarter to 8.9% among the 210 markets tracked by CoStar, according to the company’s 2012 Year-End Industrial Review and Outlook in a presentation by Rene Circ, director of industrial research for CoStar’s Property and Portfolio Research (PPR), and Senior Economist Shaw Lupton.

CoStar markets logged 103.8 million square feet of net absorption in 2012, with positive space absorbed in 151 markets accounting for 120.7 million square feet and 59 still reporting negative absorption totaling an extremely low -16.6 million. The 7 million square feet of negative absorption in the fourth quarter was the lowest quarterly total since 2005.

Although leasing ticked up in the fourth quarter, current market sentiment suggests leasing velocity remains weak. However, the two real estate economists noted, conditions appear ripe for leasing improvement as both tenant move ins and move outs are running below their historical averages. CoStar believes those conditions will eventually set the stage for new demand growth and stronger net absorption next year, Lupton said.

“On net, this was a landmark [fourth] quarter in the sense that we’re finally in the black in terms of overall demand,” Lupton said. In addition to demand gains in larger, newer building coveted by national distributors, “we’ve just recently started to see increasing improvements in the rest of the market as demand spills over in the widening economic recovery, including an improvement in the housing market.”

“After everything the industrial market’s been through in this cycle, including the worst demand losses on record, this is one of the reasons we like this sector in a slow-growth economy,” Lupton said.

“On the demand side, we’ve finally moved from the recovery period to the expansion period,” Circ added. “There’s starting to be more activity in that smaller, older space.”

Demand Fundamentals Gaining Steam

That said, 2012 was not a stellar year for absorption, at least compared with the mid-2000s, when quarterly absorption totals regularly exceeded the total for all of last year. But the fourth quarter accounted for 53 million square feet, or more than half of last year’s total.

Another strong example of improving warehouse fundamentals is the 80 basis-point decline seen in the U.S. vacancy rate at year-end 2012 of 8.9%. Among the 54 largest U.S. markets, the vacancy rate fell 40 bps to 8.4%, reflecting the stronger demand among national retailers and logistics companies.

Phoenix, Seattle, Chicago and Detroit led year-over-year occupancy growth at rates ranging from 1.6% to 1.8%.

Circ said the warehouse market has come a long way from peak vacancy rates in the mid-10% range in 2010. Fourth-quarter demand growth jumped well above the 20-year historical average of 0.4%. CoStar is forecasting that national warehouse demand should exceed available supply for another 12 to 18 months before vacancies hit bottom and start to rise again as speculative construction ramps up.

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